Renovation budget management: how this works with your home loan
Renovating a home can be one of the most exciting times in your life. You could be making the first steps towards creating your dream home or finally fixing that eye-sore of a kitchen to add value to your house. Sometimes you may even go into buying a home, knowing that ‘oh yes - this is going to need some work’.
Whatever your situation, if you’re considering renovating, you’ll want to have a good understanding of your finances, budget and all the ways you might be able to borrow in order to see your renos come to life.
You own your home and are looking to renovate.
Firstly, congratulations you own a home! That means you’ll likely have a home loan and are making repayments. This also means that you may have some options available to you – such as using your existing equity (this the value of your home, minus how much you owe on it) to borrow in order to renovate. There are a few ways this can be achieved, but the first and most important step is to go and talk to your bank.
To figure out what your financial situation is and if you’re in a position to borrow in order to renovate. We consider things like:
How well you’re managing your current repayments
Any money you’ve been able to put aside for the project
If you’ve had an increase in income
The scale / potential cost of your renovation
Whether the value of your property has increased since you’ve bought
Your current equity. For example: If your home loan is $400k and your house is currently worth $600k, your equity is $200k.
Basically, we’re making sure what you borrow, you can pay back.
The total amount you’ll be able to borrow will ultimately dictate your renovation budget – so before you start dreaming about your ultimate renovation, talk to your bank and see what you can realistically achieve.
So how is it exactly that you can use your current home loan to borrow additional money to renovate?
There are a few ways to borrow for a renovation, including either adding to your existing loan or creating a completely new one. Either way, by talking with your bank you’ll be able to work through the options to create a solution that best meets your current and future needs.
If you structure your home loan as part fixed and part floating, you’ll be able to pop any extra money on to paying your floating loan without the penalties.
Before you break out the champagne remember renovations can come with unexpected costs. This can be because it’s hard to tell what needs doing within a house until it’s pulled apart, or maybe there’s a sudden unexpected expense you haven’t budgeted for. When talking to your bank about renovations and how much you can borrow, factor in a contingency budget for the unexpected. For example: It is generally recommended that you put 10-20% of your budget aside for unexpected costs.
Sticking to your budget will be easier if you know upfront how much things are going to cost. Get a registered builder to provide written quotes, and don’t forget to check your insurance covers renovation slip-ups while you’re at it.
You are looking to buy a home that will need renovations
If you’re wanting to buy a home that will need renovations in a few years, keep in mind that you’ll likely need to borrow again in future, so make sure you let your bank know your plans when you first go to buy. That way, you’ll have a clearer picture of what you may be able to afford come renovation time.
At the end of the day
It’s important to make a plan, stick to your budget, remember to factor in the unexpected, talk to your bank and get a really solid idea of what you have to work with before you go forward with your renovations. Having all of this knowledge under your belt – plus the support from your bank, can help take the ‘scary’ and the ‘unknowns’ out of your renovation, leaving you to have fun with what you know you have to work with!
Still have questions?